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YUM - The U.S. Appears To Be in a Secular Decline

  • YUM's U.S. business has performed poorly and management does not hold out any hope that things will improve anytime soon. Management echoed previous commentary regarding its disappointment with the U.S. business, and it also seemed to indicate that a fundamental improvement in trends would not occur in the near term, given that many initiatives will be rolled out over '08 and well into '09. Consistent with continued negative same-store sales growth, U.S. EBIT continues to decline, despite the resilience of a highly franchised model.
  • Recently, management suggested that it is looking to mirror MCD's success by leveraging its current asset base, with more innovative menu offerings, daypart expansions (breakfast, late-night), and an even better value proposition. Many of the new offerings (Taco Bell's Fresco Healthy Line, Pizza Hut's Tuscani Pastas, and KFC's Grilled Chicken) appear enticing, yet will take time to roll out across the system. In our view, the new product pipeline does not address the structural issues associated with an old out-dated asset base.

YUM - Global Growth But Dependence on China Grows!

Yum has several attractive attributes making it an appealing investment vehicle: international opportunities, the Dollar doldrums, and significant cash to return to investors.

Yum's China division operates the leading chain restaurant company in China

CKR - P3 Same-store Sales Trends

  • We estimate that both concepts are running better than 3% pricing. P4 comparisons are easy for both chains.
  • Carl's Jr has seen a nice rebound despite its California concentration.
  • Hardee's is clearly experiencing a slower sales environment.

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CKR - Trying To Understand G&A

The number one topic shareholders want to talk about when it comes to CKE Restaurants is the company's cost structure, especially G&A. Since we are awaiting CKR FY08 proxy, we thought it would be a good time to focus on compensation trends for CKR's senior management.
  • We believe that investors have a reason to be concerned about the level of G&A spending at the company. As seen in Chart 1, since 2002 CKE restaurants system-wide store count has declined by 8.2%.
  • The company has stated publically that its incremental spending in G&A per store is around $20,000 to $24,000 per year. Therefore, given the decline in the system-wide store base, G&A should be $5-7 million lower form the levels seen in 2003.
  • Despite the system-wide store count declining by 8%, G&A per store has increased 39.8%

TXRH - Timeline to Changes in Managements Comp.

29-Oct-07 - Texas Roadhouse Guides 2008 EPS growth to 20% excluding the $0.01-0.02 contribution from week 53. F08 guidance is based on comps of +2.0%-3.0%.

19-Feb-08 - Texas Roadhouse Guides 2008 EPS to 5-15% growth including the contribution from week 53. Guides F'08 comps to flat to +1%.

11-Apr-08 - TXRH proxy - Executive Incentive Compensation Under the 2004 Employment Agreements - In February 2008, the board of directors of the Company approved an EPS target of $0.56 to $0.59. The annual target represents management's estimate of EPS for the fiscal year 2008, and reflects earnings per share growth of ten to 15 percent as compared to the EPS achieved for the fiscal year 2007. EPS is 2007 was $0.52.
The annual target can be adjusted for acquisitions or divestitures, accounting changes and other extraordinary events as noted by the compensation committee.

Management is now getting paid a bonus on a lower target, which also includes the 3% benefit from the 53rd week!

QSR - ROIIC - Who Gets It!

What matters most to maximizing shareholder value is how a company deploys its cash flow among growth capital expenditures, maintenance capital spending, and returning cash to shareholders. Ultimately, we believe, it is the rate of new capital deployed in new business opportunities that determines real enterprise value. The restaurant industry is littered with companies whose concepts are well positioned in the marketplace but that continue to push the limits of growth capital spending, which depresses margins, returns, and equity valuations.
  • CKRCKR's aggressive capital spending program over the past two years has not generated incremental returns for shareholders, and unfortunately for shareholders, management is not changing the business model. Like other restaurant companies we follow, the company's aggressive rate of capital spending has led to deteriorating financial results. Clearly, the decline in CKR's return on ROIIC has been highly correlated with the company's stock price. We believe that management needs to change its long-term new unit growth strategy, which should help to reverse the declining returns the company is experiencing, particularly at its Hardee's concept.

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